March 28 (Bloomberg) -- Christine Reid punched the air when
she heard Britain plans to tear up the limits on what people can
do with their pension savings. Instead of relying on a
“paltry” income, she can now invest in property.

The biggest shakeup of the pensions industry in almost a
century, announced by Chancellor of the Exchequer George Osborne
in his budget last week, has thrown open the options available
to Reid and millions of other Britons approaching retirement.

Starting next April, instead of having to buy an annuity --
an income from a life insurer -- people will be able to spend
their retirement savings however they want. After years of
dwindling annuity returns, Reid says buying a property in
northern England to rent out is looking attractive.

“Annuities give you something paltry,” Reid, a 56-year
old management consultant, said in an interview in London. “In
retirement what you want is a steady income, and there’s a
certain amount of safety in bricks and mortar. I’m certainly
considering putting some of that money towards a buy-to-let.”

Her decision underlines a risk stemming from Osborne’s
proposal to lift tax restrictions on the 13 million savers in
so-called defined-contribution pension plans. Money invested in
property instead of annuities could stoke a housing market that
some economists say is already in the grip of a bubble in London
and the southeast.

Property Boost

“I’d be surprised if this move didn’t boost the property
market,” said Ross Walker at Royal Bank of Scotland Group Plc.
“The number of people who invest in property is relatively
high, it’s a safe store in value. But this is not going to help
rebalance the economy. You also have to ask whether that will be
fueling the bubble.”

About three-quarters of pensioners currently buy an
annuity, according to government figures. People wanting to
withdraw their savings instead face a 55 percent tax charge.

Under Osborne’s proposals, the tax rate for drawing down
pensions will be as little as 20 percent. Legal & General Group
Plc Chief Executive Officer Nigel Wilson estimated this week
that the annuities market will shrink 76 percent to 2.8 billion
pounds ($4.7 billion) by 2015 as retirees choose other
investments.

According to the Association of British Insurers, a 60-year-old retiree investing 24,000 pounds in an annuity would get
a maximum of about 1,250 pounds a year. That assumes the person
has pension savings of 32,000 pounds and takes 25 percent as a
tax-free lump sum, as allowed by the current rules.

Parental Help

By comparison, a residential buy-to-let property in London
returned an average 14.6 percent in gross rental yields and
capital appreciation over the past year, and an average 8.9
percent across England and Wales, LSL Property Services
estimates.

With 36 percent of first-time buyers in London and the
southeast already relying on financial help from their family,
the new pension rules may make it easier for parents to help
their children buy a home, according to Sue Foxley, research
director at real-estate agent Cluttons.

Ed Stansfield, an economist at Capital Economics Ltd., said
that wealthier pensioners may choose property over other
investments.

“It is potentially a risk,” he said. “Many people might
feel like leaving their kids something tangible like their
property, which always goes up in value rather than stocks and
shares.”

Housing Boom

U.K. house prices are surging, powered by record-low
interest rates and demand from foreign buyers seeking safe
assets. Prices rose 6.8 percent in January from a year earlier,
the biggest annual gain since 2010, with values in London alone
jumping 13.2 percent, government data published March 25 show.

The boom has helped to spur the British economy, which grew
1.7 percent in 2013 and is forecast by the Office for Budget
Responsibility to expand 2.7 percent this year, the most since
2007.

Bank of England financial-stability officials saw
increasing momentum in the housing market and pledged to remain
vigilant to “vulnerabilities” and to take more action if
needed, minutes of their March 19 meeting published yesterday
showed.

While the full pension reforms will be implemented next
year, the Treasury has eased some restrictions already,
including raising the amount that can be withdrawn from a
pension fund without incurring the 55 percent tax rate.

Pensions Minister Steve Webb acknowledged last week that
the changes meant some retirees could use up their savings too
early. “If people do get a Lamborghini, and end up on state
pensions, the state is much less concerned about that, and that
is their choice,” he said after the budget.

Christine Reid said “savvy” investors will be better off
under the new rules.

“At the end of the day you’ve earned that money by working
your butt off all your life, so you should be able to choose
what to do with it,” she said.